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The Golden Period for Growth in Chile: Explanations and Forecasts

Published in Economic Growth: Sources, Trends, and Cycles, edited by Norman Loayza and Raimundo Soto, in Series on Central Banking, Analysis, and Economic Policies.

Economic growth in Chile since the mid 1980s has been remarkable for its high level and persistence. This paper attempts to shed light on the factors behind it and analyze the extent to which they can be sustained in the future. The first part of the paper presents some stylized facts. Taken together, they suggest that the jump in growth was driven by policies and macroeconomic conditions that affected the economy’s overall productivity. The second part of the paper considers the recent empirical growth literature to examine the extent to which a cross-country approach can explain Chile’s growth. We formulate and estimate – using techniques suited for dynamic models of panel data— a basic model containing the most popular variables in the literature. Our basic model allows us to explain about 45% of the change in the growth rate between 1970-85 and 1986-1998, which was 4.74%. When we expand the basic model to include the quality of the political system and governance, the comprehensiveness and complementarity of policy reforms, and the availability of public services and infrastructure, we can explain 73% of the growth improvement. The last part of the paper starts the evaluation of possible new growth sources for Chile by, first, projecting the country’s growth rate for the next decade under various assumptions and, second, proposing some areas with potentially large returns.